Bank of China

HK banks running risk of credit rerating, Fitch says

PUBLISHED : Tuesday, 25 October, 2011, 12:00am
UPDATED : Tuesday, 25 October, 2011, 12:00am

Hong Kong banks may face 'negative rating action' as risks from mainland-related loans grow, Fitch Ratings said.

Sabine Bauer, a director in Fitch's financial institutions team, warned that if the city's banks continued to prioritise rapid growth in mainland-related loans and lower their underwriting standards, they could experience a deterioration in asset quality and capital strength.

'Banks that have experienced very fast growth over the last two years and those most exposed to the mainland may find it most challenging to maintain solid asset quality in a weaker environment,' Bauer said.

Mainland borrowers have been seeking loans from the city's banks, partly to take advantage of low interest rates and currency exchange rates and partly to evade Beijing's efforts to tighten credit.

Hong Kong-based Chinese banks increased their mainland-related loans by 55 per cent in the first half of the year, while the exposure of non-Chinese banks grew 25 per cent.

Smaller Hong Kong banks that are tempted to expand into the riskier business of mainland-related loans and locally incorporated subsidiaries of mainland banks - such as Industrial and Commercial Bank of China (Asia) and Citic Bank International - face a higher risk of their asset quality weakening, Bauer said.

'In terms of their stand-alone credit profile, the Hong Kong subsidiaries of mainland banks are stronger than their parent banks. But their growth strategy has become very reliant on their Chinese parents,' and this could lead to a weakening of risk management and overall creditworthiness, she said.

Fitch said the city's larger banks, such as HSBC and Bank of China (Hong Kong), were better positioned to manage their rising exposure to the mainland.

It estimated that mainland exposure could rise to 35 per cent of Hong Kong banking assets by next year from 24 per cent at the end of June.

Other analysts, such as CCB International Securities' Adam Chan and Silvia Fun, said while there had been an increase in banks making provisions for mainland loans in the first half, they remained confident in the underwriting standards of Hong Kong lenders. Making provisions is an indication of bankers' expectations of losses from bad loans.

Rating agency Moody's senior analyst Sonny Hsu said he did not expect a significant rise in mainland-related impaired loans among Hong Kong lenders and that their outlooks are stable.


Increase in loans related to the mainland made by Chinese banks based in Hong Kong in the first half of the year